California stands on the precipice of destroying our safety net and putting our future prosperity in danger by cutting investments in education. This devastation is unwise and can be avoided with a combination of cuts, shared sacrifices and additional federal stimulus money, or, as a last resort, a temporary tax increase.
The key to getting started on a better path begins with understanding that,despite a lot of old myths about our budget problems, our current challenge is not our fault, and state spending currently is not escalating out of control.
Some Budget Facts
The current budget challenge is 100 percent the result of the deepening national recession. Our current budget challenges are shared by many states and local governments throughout the nation. While California failed for many years to resolve our structural budget deficit and has no plan to close the gap for the future, we did our part for 2009-2010 back in February with more than $10 billion in spending cuts and more than $10 billion in temporary tax increases.
Moreover, when the 2009-2010 budget is adopted Californians will be spending the smallest share of our income on General Fund spending in the 30 years of the post-Proposition 13 era. The 2009-2010 spending level does not even keep pace with caseload and inflation growth over the past 10 years. General Fund spending will rise 29 percent between the 2000 and 2010 budgets compared with a 53 percent increase in state population and consumer prices.
Finally, California ranks the second lowest among states in state employees relative to population and fourth lowest when local government employees are included.
Short-Term Budget Solutions
I encourage public sector employees, including those in local government and school districts, to take a temporary salary cut to save the jobs of their fellow public sector employees and to maintain public services as best we can. I do this with great respect for public sector employees and with the hope that President Obama’s goal of higher pay for teachers can be reached. But, if the choice is between greater layoffs and a temporary pay cut, I think the model of shared sacrifice for the greater good adopted by the UAW is the way to go in California.
Budgets for health and social service budgets can be cut to the minimums required by law, but no further. Reforms in parole and sentencing for non-violent drug offenders can help reduce the prison budget. School districts should be allowed to spend categorical funding as they think best. Cutting K-12 funding to the Prop 98 minimum is a bad choice for our future but may be necessary.
Related Links: Fools’ Gold | California Budget Crisis Diaries
But these steps are unlikely to balance the budget by themselves and certainly do not address the state’s budget challenges after 2010.
There is a compelling case for additional short-term federal assistance. But it is a case for all states, not just California. On June 4, the National Governors Association and National Association of State Budget Officers reported, “The 50 states are facing one of the worst fiscal periods in decades…states currently estimate that they will have faced $230 billion in reported budget deficits between fiscal 2009 and fiscal 2011.”
We should join with governors and mayors in other states to remind the federal government of three key facts that support more stimulus aid to states.
First, states are tearing down their safety net programs at precisely the time when demand is growing rapidly. The Congress understood these rising safety net demands when they increased unemployment benefits and food stamps and offered to help unemployed workers with their health insurance.
Second, many states are now facing cuts in K-12 education and cuts in access to higher education. This comes right after President Obama said that increasing and reforming our investments in education and skill building is a national imperative for economic competitiveness.
Third, these programs provide valuable public services to local communities and the nation. The rationale that the public good requires maintaining continuity in the financial sector, for AIG and in the auto industry surely applies to preventing unwise cuts in education and the safety net.
It is time for a second stimulus package. We can start by using the TARP repayments from banks that will begin soon.
Republican gubernatorial candidate Tom Campbell recently suggested that another modest temporary tax increase is preferable to borrowing, gimmicks and even more drastic cuts to public services. I agree. If additional federal stimulus money is not forthcoming and the final choice is between hurting critical long-term investments and a temporary tax increase, our future should win that battle.
Longer-Term Budget Challenges
Addressing long-term budget balance will pose very difficult challenges. One immediate suggestion I have is for the governor to extend the term of the Commission on the 21st Century Economy and refocus their effort on longer-term revenue and budget challenges. A lot has changed since the commission goals were established. They are a great group of people and their ideas on the long term budget would be welcome.
Data for Key Budget Facts
The 1978-79 state budget was the first one after Proposition 13 when the state took over major funding responsibility for K-12 education. After that year the lowest share of personal income dedicated to General Fund spending was 5.5 percent in the 1994-95 budget year.
If General Fund spending for 2009-2010 is $85 billion as proposed in the May revise, that amount would represent 5.4 percent of the income of residents as forecast by the Department of Finance for 2010-the lowest share of personal income for General Fund spending since Proposition 13 was enacted. If General Fund spending is $90 billion, that would represent 5.8 percent of expected personal income. The historical data comes from Schedule 6 of the Governor’s Budget released in January 2009.
There has been a lot of discussion about how recent state spending has surged far ahead of population and inflation growth. First, population and inflation are not universally agreed upon standards for budget growth. The share of personal income spent on General Fund programs is the usual benchmark for whether state spending is growing in line with the economy or faster or slower. The share of personal income in California allocated to General Fund spending in 2009-2010 is the lowest in the post-Proposition 13 era.
But even on the more restrictive criterion of population and inflation growth, the proposed 2009-2010 General Fund spending level falls far behind the increase in population and the Consumer Price Index over the past 10 years.
State population growth was 16 percent between 1999 and 2009. The California Consumer Price Index rose by 33 percent. The combined effect of these two factors is a 53 percent increase-the math is that the increases are multiplied, not added. But the proposed 2009-2010 General Fund spending of just over $85 billion is only 29 percent above the $66.5 billion spent in the 1999-2000 budget.
If General Fund spending reaches $90 billion in 2009-2010, that would still be only a 36 percent increase over 10 years ago, and if the General Fund spending reached $95 billion, that would result in a 44 percent 10-year gain, still far below population and inflation growth.
It is true that spending outpaced population growth and inflation between 2003 and 2007 but that is picking a very selective set of years. Recent budget cuts have pushed spending far below any possible criterion for reasonable budget growth in terms of caseload, inflation and keeping pace with the economy.
California has the second lowest ratio of state employees to population among all states. In 2007, the latest year for which data was reported; California had 103 full-time equivalent state employees per 10,000 residents, second to Illinois with 97. The national average was 143 state employees per 10,000 residents.
California ranks fourth lowest among states for state and local government employees, including school districts, with 484 employees per 10,000 residents.The national average in 2007 was 544 state and local government employeesper 10,000 residents.
[ All of the data is from the California Department of Finance website.]
This column appeared in New America Media. Stephen Levy is director and senior economist of the Center for Continuing Study of the California Economy (CCSCE) in Palo Alto. CCSCE is a private research organization founded in 1969 to provide an independent assessment of economic and demographic trends in California. NAM will regularly publish Levy’s insights and analysis on California’s economic landscape, which originally appear on the CCSCE website: www.ccsce.com.
Tags: budget mess, california legislature, deficit, Schwarzenegger, SDNN
Comment by: Tim Posted: July 9, 2009, 10:30 am
One need to look at the unions in state government. Our funds are depleted buy bloated number of union employees and their compensation packages. Union employees can retire as early as 50 and thir pension plans are 90% of their last year salaries. A cop with 25 year of experience can retire with 100k pension. We taxpayers don’t get these kind of retirements. During tough times unions don’t cut jobs they resort to furloughs only. Time has come to say no to unions and no more taxes.
Comment by: Ray Posted: July 9, 2009, 11:53 am
Unions can drive a business “Out Of Business” but what happens when unions are in public sector? They drive up the taxes and eventually government (union force) gets so big that it takes lot of money to run, and eventually the state comes to stand still. There is no need for unions in public sector, all they do is drain funds and get bigger and bigger. Efficiency it the other problem with union force.
Comment by: Conor Posted: July 9, 2009, 2:40 pm
Mr. Levy’s analysis of the state’s fiscal situation is both enlightening and interesting. I found his statement from Tom Campbell particularly on mark. There are many options to address the budget crisis but borrowing money and turning to gimmicks shouldn’t be considered. Accounting gimmicks such as the proposed three percent withholding on independent contractors are not the solution. That proposal is back in the Democrats’ plan even after it was abandoned this past fall because it will leave the statement in even worse shape down the road. If it wasn’t a good idea then, why is it a good idea now?
Comment by: Robert Posted: July 9, 2009, 3:47 pm
It is absurd to think that an influx of federal dollars will stave off the problems facing California and some other states. The first question to be asked is: How do we pay for it at the federal level? Deficit spending is disastrous and should not be considered a viable option. California has many programs that need to be evaluated before cutting any school and civil service funding. It is one thing to advocate costly programs, but quite another to find a way to pay for them. A second stimulus should not be given serious consideration, it would burden future generations with an insurmountable debt. Get over the pet projects and the do-good benefits and we will all be amazed at how much can be cut from the budget.
Comment by: Dave Posted: July 9, 2009, 3:51 pm
What takes CA off of this course?..An economic catastrophe so disastrous that the productive sector’s survival is at stake. But CA is still too rich to have to grow up, and the unionists are much too entrenched.
This “privileged” sector will continue to grow and may ultimately take to the streets themselves demanding the “state” do more. If we reach the “tipping point” of a majority entitlement class like France it will be too late. Let’s roll back union/govt power now.
Comment by: Yoshi Posted: July 9, 2009, 4:39 pm
One thing that can be taxed is marijuana. Legalization of marijuana, and the corresponding taxes on it, as well as the money saved by police not spending their time chasing those who grow and consume it, would bring in billions to the state’s coffers. Legalization of marijuana is the salvation of California, the Nation and the World!
Comment by: Paul Posted: July 9, 2009, 7:58 pm
I have to laugh at this quote, “Addressing long-term budget balance will pose very difficult challenges.” The reason the budget is a problem is because the quality of government management practices in California is the worst in North America.
Bad Management Practices for forty years created this mess and poor public funds uses has made the problems into a 30 billion plus hole in the balance sheet.
The only choice now is slash the budget then fire every elected official!
Comment by: Guest Posted: July 10, 2009, 3:34 pm
RIGHT, LEGALIZE MARIJUANA. TAX IT, DON’T SEND THE USERS AND DEALERS TO PRISION. THE STATE WOULD MAKE LOTS OF MONEY. WHILE THEY ARE AT IT, THEY SHOULD ALSO LEGALIZE PROSTITUTION, ALL THOUGH, THAT WOULD HAVE TO BE MORE COTROLLED, MAKE SURE THE GIRLS ARE CLEAN, NOT SPREADING ANYTHING AROUND. MONEY, MONEY, MONEY!!!
Comment by: Semore Posted: July 10, 2009, 3:56 pm
Who ever heard of a temporary tax? That’s a joke. We are funding failure everywhere and until we stop it will never end. If you reward failure you will get more of it, punish success you will get less. Example: We keep throwing money at schools and they keep getting worse. You give more money to politicians and they waste it. Extravagant pensions, health care and overpaid state workers are going to break the bank when the baby boomers start cashing in. The rest of us in the private sector will work forever to try and pay for it. Privatize everything you can and let the free market work. Also if we cut off funds to the people who aren’t suppose to be here and it would just about balance the budget. Oh, I forgot we can’t talk like in California.
Comment by: Tom Posted: July 11, 2009, 2:16 am
California’s problem is they don’t want to budget. We have two state Congressional groups “DEMOCRATS” and “REPUBLICANS” but both can not agree to make cuts. The democrats want to raise taxes, whether its (Raise Sales Taxes, Property Taxes, Vehicle License Fees, etc) but that will allow State Assembly people and State Senators to just continue raising the taxes on the common workers without making any cuts. BACK IN the 1990’s and 1980’s WE HAD A MUCH SMALLER STATE BUDGET AND PEOPLE WERE RELATIVELY HAPPY THEN. We didn’t have draining programs like class size reduction for K-3rd grade, which costs the state an excessive amount of money. The state actually want’s us to believe that kids can only learn if the class size is under 20 kids per class. MY MOTHER WENT TO A SAN FRANCISCO SHCOOL AND SHE HAD 50 KIDS IN HER CLASS FOR A FEW YEARS, AND SHE HAS A BACHELORS DEGREE TODAY. The Problem is we have such an extreme amount of kids that can not speak English, at an appropriate level for school. Thus, the state adds costly programs to support illegal immigrant’s families like (Class Size Reduction, Medi-Cal costs, Food Stamp Fees, Section 8 reduced rent fees, WIC , TANF Fees.) YES, I DO KNOW THERE ARE ALSO U.S. CITIZENS IN CALIFORNIA THAT UTILIZE THESE PROGRAMS, BUT NOT NEARLY AT THE AMOUNT THE ILLEGALS USE THE PROGRAM. And I do realize that illegals come from country’s that do not give them as much opportunity. But, the state needs to close its border, to restabilize itself, before allowing more immigrants to come in down the road, OR ELSE CALIFORNIA WILL ALWAYS HAVE A SLUGGISHLY DRAINED ECOMONY INTO THE FUTURE.
Now California’s problem are not just immigrants. State retirees (PERS and STRS retirees) now outnumber active state workers 2 to 1. THAT”S NOT GOOD. Thus, for California to get things straigtened out they need to budget and make cuts. THE ONLY THING THAT IS SAVING THE COMMON PERSON, IS WE HAVE A REQUIRED 2/3 MAJORITY VOTE. IF THE STATE’S CONGRESS PEOPLE HAD IT THEIR WAY, THEY WOULD HAVE CHANGED IT TO 50.1% MAJORITY, AND THEN THEY WOULD HAVE RAISED MORE TAXES UPON US EASILY. THUS, THE 2/3 MAJORITY VOTE MAY ACTUALLY SAVE THE COMMON WORKER BY ACTUALLY FORCING THE STATE CONGRESS TO BUDGET. If the state congress can not agree to a budget then all the state Democrats and Republicans need to be voted out! Everyone of them. We all have to budget in every day of our lives. Therefore, they need to budget just as we do.
Its about time that they do the right thing.
Comment by: James Katt Posted: July 11, 2009, 12:24 pm
As long as the state is not paying into an employee’s retirement fund AFTER the employee has retired, I’m OK with that - even if that cop has 100 K a year in retirement. Then that cop earned his retirement.
BUT, a huge problem is that the state IS PAYING into the retired person’s retirement. THIS DESTROYS the budget. THIS IS LIKE HAVING A LIFETIME JOB BUT DOING NOTHING FOR IT.
Once an employee has retired, the state should NOT give any further funds to that employee’s retirement fund. Period. This is what everyone else has. Thus the retired employee just has to join the rest of the people.
Comment by: kelly Posted: July 12, 2009, 7:45 pm
The unions are not causing the budget deficit. I am so tired of hearing Republicans repeat that propaganda ad nauseum.
Arnold blew a 6 billion dollar a year hole in the budget when he cut the car tax and then again when he borrowed 15 billion dollars. Now he’s using the crisis he created as an excuse to make deep cuts in education that he knows Californians do not support. He hates education because education reduces inequality. He was raised by people who loved the fuhrer, do don’t expect him to care about education.
The morons who voted for this imbecile are the ones who should lose their jobs over this. Not those of us were are smart enough to know that you don’t turn over one of the biggest economies in the world to an uneducated, inexperienced boob who made all of his money saying “I’ll be back.”
Furthermore, CA sends more money to Washington DC in taxes than we get in services. CA is a donor state. We need our money back so that we can balance our budget.
I am very angry at Obama for not helping CA. He’s the weakest President I have ever seen, and I wish the Dems would run somebody else in 2012.